Indemnification Clauses in Construction Contracts: What You're Agreeing To
Indemnification clauses are among the most consequential language in any construction contract and among the least read. A broad indemnification clause can make you responsible for injuries and damages that had nothing to do with your work.
Before you price
What an indemnification clause says
An indemnification clause requires one party (the indemnitor) to defend and compensate another party (the indemnitee) for certain losses, claims, and liabilities.
In a typical construction contract between an owner and a contractor, the contractor indemnifies the owner. The clause might say: 'Contractor shall defend, indemnify, and hold harmless Owner from all claims, damages, losses, and expenses arising out of or resulting from Contractor's performance of the work.'
So far, that is reasonable. The contractor is responsible for its own work. The problem is what gets added to that clause.
Broad form vs. limited form indemnification
Broad form indemnification requires the contractor to indemnify the owner even for the owner's own negligence. If the owner does something that contributes to an accident and someone gets hurt, the contractor still has to pay the owner's defense costs and any judgment.
Limited form indemnification (also called comparative fault indemnification) requires the contractor to indemnify the owner only to the extent of the contractor's own fault. If the owner is 60 percent responsible and the contractor is 40 percent responsible, the contractor covers its 40 percent share.
Many states have anti-indemnity statutes that void broad form indemnification clauses in construction contracts. Know your state's rules. But do not rely on the statute as a substitute for reading the clause. The statute may have exceptions, and litigation is expensive even when you win.
The insurance tie-in
Indemnification clauses often work together with additional insured requirements. The owner requires you to add them as an additional insured on your commercial general liability policy, and they also require you to indemnify them.
This means your insurance is the first line of defense for claims that may have nothing to do with your work. Read your policy limits relative to what you are indemnifying. If you are indemnifying a $50 million project and your CGL limit is $1 million per occurrence, there is a gap.
Your broker should review any indemnification clause you are considering accepting. The insurance coverage and the contractual obligation need to align.
What to ask for instead
On private work, push back on broad form indemnification. Ask for mutual indemnification: each party indemnifies the other for its own negligence. This is fair and enforceable in most states.
If the owner will not agree to mutual indemnification, ask for limited form: you indemnify for your fault only, not the owner's.
Get the final contract language to your attorney and your insurance broker before you sign. This is not optional review on large projects.